A new game theory study suggests a win/win strategy for the online music …

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The standard line that Digital Rights Management (DRM) functions as a bulwark against online music piracy is being challenged by a trio of economists from Rice and Duke Universities. Their game theory research sides with a growing sentiment that DRM technologies which restrict music file copying and moving sometimes encourage illegal file sharing instead.

"In many cases, DRM restrictions prevent legal users from doing something as normal as making backup copies of their music," contends one of the researchers, Dinah Vernik, assistant professor of marketing at Rice's Jones Graduate School of Business. "Because of these inconveniences, some consumers choose to pirate."

The paper in question is titled "Music Downloads and the Flip Side of Digital Rights Management Protection."

Under certain conditions, "we find that eliminating DRM restrictions can lead to an increase in sales of legal downloads, a decrease in sales of traditional CDs, and a decrease in piracy," conclude marketing scholars Vernik and Devavrat Purohit and Preyas Desai of Duke. "This is in stark contrast to the view that removing DRM will unconditionally increase the level of piracy."

Pure joy

To make this case, Vernik, Purohit, and Desai set up an economic game model based on the "Nash equilibrium" created by Nobel laureate economist John Forbes Nash. That system assumes the existence of an array of marketing strategies characterized by one property: no player benefits by altering her strategy while the other players stand pat on theirs.

From this point of departure, the economists establish a hypothetical environment in which there exists an album of music. It can be obtained in two formats: "traditional" (CDs) and "downloadable" (MP3 or AAC files). The scholars are interested in the latter format, and create a market timeline through which the music moves, either equipped with DRM or not.

First, they establish a base utility equation for the item, "which reflects the pure joy of listening to that particular album." But, they note, "consumers' net utility is affected by their preferences for format (traditional or downloadable), their cost of stealing, and the restrictions imposed by DRM."

And therein lies the rub. Faced with the choice of buying or pirating, music lovers will assess the costs differently. "A highly ethical consumer or a novice computer user will have a very high cost of pirating," the economists observe, "whereas a consumer who does not see piracy as stealing or an expert computer user will have a much lower 'pirating cost."

Thus, two "segments" are established for the game. In segment "H" (high) consumers face a "high moral pirating cost." In segment "L" (low) they perceive a "lower moral pirating cost." The game rules assume that "H" is high enough to discourage those consumers under its sway from obtaining pirated tunes. On the other hand, "some consumers in segment L may engage in piracy."

Let the game begin

The game then moves through three stages. In stage one, the record label chooses its formats. In stage two, retailers set their retail prices. In the final stage, "consumers maximize utility by choosing the optimal product available in the market."

That optimal product may come in the form of a download without DRM—that is, a file sold by Retailer D that they can copy or move at their convenience across various platforms. Or it may come with a DRM impediment, sold by Retailer T. "H segment" consumers will choose between these retailers. "L segment" buyers will choose between them and "stealing a digital copy from the Internet."

Having established these rules, the scholars plug in various economic formulas to review the fate of a series of propositions regarding the impact of DRM. These are arguments about the conditions under which DRM discourages or does not discourage illegal downloading.

Bottom line, they argue that eliminating DRM under various conditions reduces illegal downloading:

This conclusion stems from the idea that by introducing DRM-free music, the music label increases the downstream competition between the traditional format and legal downloads. Because DRM-free music is a stronger competitor for traditional CDs, it forces the prices of CDs to move down, which in turn lowers the legal download price. This competition between the traditional and download formats lowers prices such that some consumers move from stealing music to buying legal downloads. Thus, removing DRM can lower the level of piracy. Furthermore, we find that this result can occur even when consumers do not see any difference in the utility they derive from DRM-free and DRM-restricted products.

Thus, removing DRM represents a good deal for consumers in all segments of the market: "In particular, traditional consumers of CDs benefit from a lower price; consumers of legal downloads get higher utility with a DRM-free version even though the price of the legal version may increase; and, interestingly, consumers who obtain pirated versions benefit because it is easier to steal music when there is no DRM."

Rushed and buggy

Obviously, the content industry is not interested in helping consumers obtain pirated content under any circumstances. But as the authors note, the idea of DRM-free music has definitely taken on a life of its own, embraced by EMI, Universal, and Warner for some time. Ditto for Apple when it comes to music on iTunes.

Not nearly often enough for many consumers. Thanks to DRM, "just sitting down and playing a game is getting harder and harder to do," we lamented six months ago. "Game publishers of all stripes are getting greedy, and putting out games that are rushed, buggy, deliberately incomplete, and addled by bone-headed DRM schemes that serve mainly to frustrate legit players."

The Rice/Duke paper notes that Spore's original DRM restrictions were so tough that TorrentFreak crowed that they "encouraged thousands to get their copy illegally."

"Attributing abnormally high piracy levels to DRM is consistent with the analysis in our paper," the marketing experts conclude.

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Matthew Lasar
Matt writes for Ars Technica about media/technology history, intellectual property, the FCC, or the Internet in general. He teaches United States history and politics at the University of California at Santa Cruz. Emailmatthew.lasar@arstechnica.com//Twitter@matthewlasar